2018 (4) TMI 802 - HC - Income Tax

Loss in open market trading - speculative loss or not - set off the loss against the normal business income - denial on the ground that the assessee failed to prove that transactions were done through a recognised stock exchange viz. MCX stock exchange and was not supported by proper time stamped contract notes and that the transaction did not qualify as an eligible transaction - losses in speculation business - Held that - The transaction done by the assessee is not a speculative transaction but it only comes under provios (d) to Section 43(5) thereby it is only a non speculative transaction and thus exempt from tax. Section 73 of the I.T. Act deals with losses in speculation business . Explanation to Section 73 categorically states that in the case of a company business of purchase and sale of shares is deemed to be speculative business. In the instant case the assessee had suffered loss in trading of derivatives carried through Multi Commodity Stock Exchange. As derivative transactions being separate from trading in shares provisions of Explanation to Section 73 will not be applicable to such transactions and hence the loss incurred by the assessee in derivative transactions through recognised stock exchange has to be set off against other business income as per provisions of the Act. The transaction carried out by the assessee is a non speculative transaction and thus Section 43(5) is not attracted to the facts of the instant case and likewise the assessee was trading in derivatives and not in shares so the loss suffered by the assessee in trading in derivatives is excluded from the ambit of Explanation to Section 73 - We concur with the decision taken by the Appellate Tribunal as well as the Commissioner of Income Tax (Appeals) in rejecting the view taken by the Assessing Officer to add 60, 66, 466/- as loss on open market trading to the income of the assessee. - Decided against revenue

Summary

Issues Involved:
1. Whether the transactions in commodity derivatives through Multi Commodity Stock Exchange (MCX) are speculative transactions under Section 43(5) of the Income Tax Act.
2. Whether the loss incurred by the assessee in trading derivatives can be set off against other business income.
3. Applicability of Explanation to Section 73 to the transactions in derivatives.

Detailed Analysis:

Issue 1: Speculative Transactions under Section 43(5)
The primary issue revolves around whether the transactions in commodity derivatives carried out by the assessee through the Multi Commodity Stock Exchange (MCX) qualify as speculative transactions under Section 43(5) of the Income Tax Act. The Assessing Officer (AO) argued that the transactions were not conducted through a recognized stock exchange and lacked proper documentation, thus deeming them speculative. However, the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal (ITAT) found that the transactions were carried out through a recognized stock exchange and were supported by time-stamped contract notes, making them eligible transactions under Section 43(5)(d). Consequently, these transactions were not deemed speculative.

Issue 2: Set Off of Losses Against Other Business Income
The AO contended that even if the transactions were considered eligible, they should be treated as speculative, preventing the set-off of the loss against other business income. The Commissioner of Income Tax (Appeals) and the ITAT disagreed, stating that since the transactions in derivatives were not speculative, the losses incurred could be set off against other business income. The Tribunal emphasized that the transactions were carried out electronically on a recognized stock exchange and were supported by proper documentation, thus qualifying as non-speculative.

Issue 3: Applicability of Explanation to Section 73
The AO also argued that the transactions should be considered speculative under the Explanation to Section 73, which deems the business of purchasing and selling shares as speculative for certain companies. However, the Commissioner of Income Tax (Appeals) and the ITAT clarified that derivatives are financial instruments distinct from shares. Therefore, the Explanation to Section 73 does not apply to transactions in derivatives. The Tribunal concluded that the loss incurred in trading derivatives through a recognized stock exchange should be set off against other business income, as per the provisions of the Act.

Conclusion:
The High Court upheld the decisions of the Commissioner of Income Tax (Appeals) and the ITAT, concluding that the transactions in derivatives carried out by the assessee were non-speculative and eligible for set-off against other business income. The substantial questions of law were answered against the Revenue, and the Tax Appeal was dismissed.